TODAY’S STUDY: THE COST OF COAL, A CASE STUDY

Navajo Generating Station and Air Visibility Regulations: Alternatives and Impacts
David J. Hurlbut, Scott Haase, Gregory Brinkman, Kip Funk, Rachel Gelman, Eric Lantz, Christina Larney, David Peterson, Christopher Worley, Ed Liebsch, January 2012 (National Renewable Energy Laboratory)
Executive Summary

The U.S. Environmental Protection Agency (EPA) intends to issue rules for controlling emissions from the Navajo Generating Station (Navajo GS) that contribute to haze at the Grand Canyon and at several other national parks and wilderness areas. The final rule will be based on what EPA determines is the best available retrofit technology (BART) for the control of haze-causing air pollutants, especially nitrogen oxides (NOx).

Several factors make this case unusually complex. Unlike other coal plants in the West, Navajo GS came into being at the initiative of the federal government. Low-cost power from Navajo GS runs the massive pumps of the Central Arizona Project (CAP)—a major water delivery project built to fulfill terms of the Colorado River Compact, a multistate water agreement that many consider to be one of the most contentious in U.S. history. In addition, the plant and the coal mine that supplies it are located on tribal lands. The U.S. Bureau of Reclamation (Reclamation) owns the largest share of the plant on behalf of the federal government. Some of Reclamation’s sister agencies within the U.S. Department of the Interior, however, have missions relating to tribal affairs, national parks management, and habitat protection that in this case are not easily reconciled with Reclamation’s job of supporting the CAP with low-cost power.

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Many of the analyses conducted by and for parties in this case have contemplated three possible BART outcomes:

■ accepting existing plant improvements as the standard with no additional retrofit;
■ adopting selective catalytic reduction (SCR) as the standard; or
■ shutting down Navajo GS because of the cost of SCRs and other upgrades that may be required under future emission rules.

The two SCR scenarios include SCR only, and SCR plus additional controls (baghouses and sorbent injection) in anticipation of future emission regulations. Navajo GS owners are also considering selective non catalytic reduction, which would cost less than SCR but would remove less NOx.

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Under any outcome, the burden of compliance will probably fall most heavily on those who rely on the federal government’s 24.3% share of the power plant. Furthermore, the web of needs laying claim to the government’s share is uniquely complex. Therefore, a BART outcome that met Interior’s interests—secure sources of power for CAP, no additional disruption of tribal economic development, and good stewardship of national parks and other public lands—would in all likelihood be adaptable to the needs of the utilities that rely on Navajo GS for part of their conventional supply needs. This would especially be true if the outcome allowed time for Interior to prepare for a smooth transition to cleaner energy sources for CAP, and allowed the utilities time to fully depreciate their current investments in Navajo GS.

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EPA’s statutory authority in this particular proceeding focuses on visibility at national parks and other priority areas. The analysis and findings of this report (conducted by NREL for the Department of the Interior) focus on these statutory issues and therefore address only a small subset of the issues facing coal-fired power plants throughout the country. This report does not address the larger question of whether Navajo GS should continue operating or should retire. Rather, the questions have to do with how proposed changes to the plant are likely to affect visibility. (A supplemental volume examines the feasibility of using clean generating technologies to achieve comparable outcomes.)

With respect to BART determinations, the Clean Air Act requires EPA to …take into consideration the costs of compliance, the energy and nonair quality environmental impacts of compliance, any existing pollution control technology in use at the source, the remaining useful life of the source, and the degree of improvement in visibility which may reasonably be anticipated to result from the use of such technology.

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This report’s main conclusions address these statutory factors.

Cost of compliance

Economic analysis suggests that, holding all other factors the same, installing SCRs at Navajo GS would likely cost less than shutting it down and replacing it with power from unused capacity elsewhere in the West. Key uncertainties that could affect the basic economics include (among other factors) investment recovery timelines, changes in future plant ownership, changes in transmission path ratings, renegotiating the site lease with Navajo Nation, and delivery commitments under long-term power contracts.2 Figure ES-1 shows likely ranges of additional annual costs associated with two SCR scenarios, and with shutting down the plant and replacing it with the West’s least expensive unused capacity.

The cost burden of either SCR option or shutdown would probably fall more heavily on the Bureau of Reclamation than it would on any of the five utilities that also own shares of Navajo GS. This is due to the fact that Reclamation and the Central Arizona Water Conservation District rely on Navajo GS for 92% of the total electricity needed for the CAP, while the utility partners rely on the plant for only 9% to 26% of their total electricity supply.

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SCR capital costs would result in a likely retail rate increase of between 0.02 cents to 0.06 cents per kilowatt-hour for Navajo GS’ utility partners. This would translate into a rate impact of 0.2% to 0.6%. Other uncertainties could result in increased business costs besides capital costs that would also be recovered in retail rates. Separately, The operation and maintenance (O&M) costs associated with SCRs would increase Navajo GS variable production costs by 3% to 4%, which would leave the plant still as one of the lowest-cost generators in the Desert Southwest.

Unlike its utility partners, Reclamation lacks an established rate mechanism for recovering its share of future capital costs for Navajo GS. Assuming no federal appropriations, the additional capital costs and production costs associated with SCRs would probably increase power costs for the CAP by 0.39 cents to 0.48 cents per kilowatt-hour. For agricultural users and Indian tribes, water rates from CAP would likely increase between 13% and 16%. For municipal and industrial users, the increase would likely be between 5% and 7%. Baghouses and sorbent injection would roughly double the impact on water rates.

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Energy impacts of compliance

Installing SCRs would not significantly change the amount of energy provided by Navajo GS. On-site employment at the power plant and the mine would be unchanged, except for the possible addition of a small number of jobs at the power plant to operate and maintain the SCR equipment. Shutting down Navajo GS would change the regional flow of power. Least-cost redispatch would tend toward replacement power from combined cycle natural gas plants in Nevada, Arizona and Southern California that already exist and have spare capacity. Southern California currently obtains a large portion of its electricity supply from Arizona and Nevada. Shutting down Navajo GS would tend to reduce these flows, with more of the power that is generated in Arizona remaining in state.

Nonair quality environmental impacts of compliance

Environmental impacts aside from air quality primarily affect the Navajo and Hopi populations living near the power plant and the mine that supplies its coal. Non-governmental organizations express concerns about harm to health and groundwater in particular. No epidemiological studies have specifically examined health impacts resulting from either Navajo GS emissions or coal mining operations. Conflicting studies offer different conclusions about the effect of mining operations on local ground water. Nevertheless, these impacts—regardless of their true extent—are largely a function of whether the plant operates at all. Visibility-related retrofits that would result in continued operations at the plant and the mine would likely cause no discernible change in these environmental impacts.

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Existing pollution control technology

Scrubbers installed at the three Navajo GS units in 2000 have reduced SO2 emissions by more than 95%. Low-NOx burners and separated overfire air systems have reduced NOx emissions by 40%, relative to what the plant’s air permit allowed before these controls were added. This compares to the 78% reduction that could be achieved with the addition of SCRs, and the 50% to 60% reduction estimated for SNCR controls.

Remaining useful life

Navajo GS will have been in service 45 years when its site lease with Navajo Nation expires in 2019. While 45 years was a typical useful lifespan for smaller coal plants in the U.S. built prior to Navajo GS, larger coal plants built around the time of Navajo GS appear to be lasting longer, in that relatively fewer of their group are retiring early and the ones that remain continue to sustain high capacity factors. The utility partners’ capital investments in Navajo GS (including retrofits to date) are on track to be fully depreciated no later than 2026, when the plant will have had more than 50 years in service.

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Degree of improvement in visibility

While conclusions in this report regarding the electricity sector are clear, those regarding visibility must be more circumspect. The question fundamental to this proceeding—how reducing NOx from Navajo GS would contribute to improving visibility at the Grand Canyon and other areas of concern—requires a deeper inquiry and more time than was allowed for this project, and it requires expertise in atmospheric chemistry and air transport modeling, not power sector expertise. Evidence suggests that NOx emissions from Navajo GS are a likely incremental contributor to haze at the Grand Canyon. Whether the incremental contribution is significant or even perceptible is a matter of debate among experts in the field of visibility science.

Monitoring and other evidence suggests NOx is a weaker contributor than SO2, which has already declined 95% at Navajo GS since the installation of scrubbers in 2000. The body of research to date (summarized in this report) is inconclusive as to whether removing approximately two-thirds of the current NOx emissions from Navajo GS would lead to any perceptible improvement in visibility at the Grand Canyon and other areas of concern.

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Summary of Tribal Benefits and Impacts

The EPA’s BART determination will have diverse impacts on Arizona’s tribes. There are two primary categories of effects: those related to power generation and mining, and those affecting the cost of CAP water delivered to tribes who have signed water settlement agreements, including potential funding that could be made available through the Lower Colorado River Basin Development Fund (Development Fund).

Tribal economic benefits associated with the direct operations of both the Navajo GS and Kayenta mine— more than $150 million per year—would continue to accrue under all future scenarios with the exception of complete plant shut down, or the shutdown of one or more individual units. Approximately 450 Native Americans are employed at the Navajo GS, and 400 are employed at the mine. The total wages and benefits approximately $100 million per year. In addition, the Kayenta mine also makes annual payments of just over $50 million per year to the Navajo Nation and Hopi Tribe ($13 million to Hopi, $37 million to Navajo) for coal royalties and bonuses, groundwater usage, and purchase of electricity from the Navajo Tribal Utility Authority. Additional benefits for the tribes include several hundred thousand dollars per year in scholarship funds, and local property taxes which primarily go to schools in the region. SRP also pays the Navajo Nation about $1 million/year in lease and air permit fees for the Navajo GS itself.

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A significant increase in the cost of power from Navajo GS could affect settlements with some Indian tribes who surrendered future water right claims in exchange for low-cost access to CAP water and other benefits. Installation of SCR controls at Navajo GS would likely increase tribes’ water delivery rates by 13% to 16% ($7 to $9 per acre-foot); SCR controls with baghouses would double that impact. A more detailed examination of the implications for tribal water settlements (for example, determining the threshold at which the rate increase would be materially significant) would require a legal analysis that was beyond the scope of this study. If Navajo GS were to shut down, the Indian and Agricultural users of CAP water would see per acre-foot increases of as much as 66%, while municipal and industrial users would see increases up to 52%.

A significant area of concern for CAP water-using tribes relates to the potential for sales of surplus Navajo GS power to exceed the $55 million annual CAP repayment obligation. In cases where annual revenue into the fund exceed $55 million, the “second cascade” of funding disbursements would kick-in, with initial funds in the second cascade going to reduce the fixed operations, maintenance and replacement charges associated with the delivery of CAP water to Indian tribes. Under a new agreement related to the sales of surplus Navajo generation, approximately 1 TWh of primarily off-peak power would be up for sale on the general wholesale power market, making this portion of excess power revenue more directly subject to market prices. Current power prices are not high enough to support flows into second-cascade disbursements, nor have they been since 2008. Two factors could mitigate against higher power prices in the future: success of energy efficiency programs in Arizona and other Southwest states, and additional natural gas supplies resulting from the development of shale gas.